BANK RECONCILIATION STATEMENT

 Introduction :

 Usually all the firms open a current account with the bank as there are so many transactions

 and record these transactions in the Bank column of the Cash Book. Bank also maintains a

 separate ledger account of each firm (customer) and periodically supplies a copy of the

 account to the firm for information. This copy of the firm’s Account supplied by the bank is

 known as Bank Statement or Bank Pass Book.

 Since all the transactions with the bank are entered in both the books Cash Book and Pass

 Book, the balances of the two books should tally with each other. But usually the two

 balances don’t tally.

 Bank Reconciliation Statement is prepared to reconcile the difference between the Bank

 Balance shown by the Cash Book and Bank Pass Book.

 DEFINITION :

 A schedule showing the items of difference between the bank statement and the bank column

 of Cash Book is known as Bank Reconciliation Statement.

 Causes of Differences in Cash Book and Pass Book :

 The differences may be caused by either –

 (A) Time gap in recording transactions or

 (B) Errors Committed in recording transactions.

 (A) Differences Caused by the time gap :

 Reasons for the time gap in recording the transactions in the two books (Cash Book and Pass

 Book) are as given below –

 1. Cheques issued but not yet presented for payment in the bank.
 2. Cheques deposited or paid into the bank for collection but not yet credited by the

 bank.

 3. Cheques deposited but dishonoured by the bank.

 4. Interest allowed by the bank.

 5. Interest on overdraft, bank charges, commission etc. charged by the bank.

 6. Direct Deposit by the customers into the bank.

 7. Interest, Dividend etc. collected by the bank.

 8. Direct payments made by the bank on behalf of customer as per standing instruction.
 (B) Differences caused by Errors Committed :

 Such errors may be of two types

 1. Errors committed by the firm

 1. Cheques issued to some creditors but omitted to be recorded in the Cash Book

 or recorded twice.

 2. Cheques deposited into the bank omitted to be entered in the Cash Book or

 recorded twice.

 3. Error in totalling or balancing the bank column of the Cash Book.

 2. Errors committed by the bank

 Something bank records a wrong entry in the customer’s account which causes a difference in

 the two balances.

 Need and Importance :

 1. It helps in locating and rectifying the errors or omissions committed either by the firm

 or by the bank.

 2. Customer becomes sure of the correctness of the bank balance shown by the cash

 book.
 3. Facilitates the preparation of amended or revised Cash Book.

 4. Reduces the chances of fraud by the staff of the firm or bank.

 5. Helps in keeping a track of the cheques deposited for collection.

 Procedure of Preparing Bank Reconciliation Statement A Bank Reconciliation Statement is

 prepared when we get the duly completed Pass Book from the Bank. On receiving the Cash

 Book

 1. First of all tally the Debit side entries of the cash book with the Credit side entries of

 the Pass Book and vice versa.

 2. Tick the items appearing in both the book.

 3. Unticked items will be the points of differences.

 4. A BRS is then prepared by taking either the balance as per Cash Book or Pass Book

 as a starting point.

 Important Points :

 1. If the Starting point is Cash Book Balance then the ending point will be Pass Book

 Balance.

 2. If the starting point is Pass Book Balance then the ending point will be the Balance as

 per Cash Book.

 3. Debit Balance as per Cash Book or Credit Balance as per Pass Book, means that the

 firm has that much amount of deposited at the bank also called favourable balance

 write the amount under + item.

 4. Credit Balance as per Cash Book or Debit Balance as per Pass Book, means that this

 much amount has been withdrawn in excess of deposit

 also called overdraft or unfavourable balance

 write the amount under - item.

 4. IMPORTANCE OF BANK RECONCILIATION STATEMENT

 Bank reconciliation statement is a very important tool for internal control of cash flows. It helps

 in detecting errors, frauds and irregularities occurred, if any, at the time of passing entries in

 the cash book or in the pass book, whether intentionally or unintentionally. Since frauds can be

 detected on the preparation of bank reconciliation statement therefore accountants are careful

 while preparing and maintaining the records of the business enterprise. Hence it works as an

 important mechanism of internal control. Following are the salient features of bank
reconciliation

 statement :

 (i) The reconciliation will bring out any errors that may have been committed either in the cash

 book or in the pass book;

 (ii) Any undue delay in the clearance of cheques will be shown up by the reconciliation;

 (iii) A regular reconciliation discourages the accountant of the bank from embezzlement. There

 have been many cases when the cashiers merely made entries in the cash book but never

 deposited the cash in the bank; they were able to get away with it only because of lack of

 reconciliation.

 (iv) It helps in finding out the actual position of the bank balance.